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Market Bulletin - Eclipsing records

23 March 2015

The FTSE 100 Index hits 7,000 for the first time to double its post-credit crunch low.

After a lunar spectacle that won’t be repeated for 75 years, the week ended with another event which also felt very distant in the depths of the financial crisis. After five consecutive daily rises, the FTSE 100 Index finished the week by powering above the psychologically important 7,000 level for the first time – the highest level in its 31-year history and double its post-credit crunch low in March 2009.

The blue-chip index was boosted by Wednesday’s saver-friendly Budget, but most notably by expectations that the Federal Reserve and the Bank of England are in no hurry to raise interest rates. Last week’s US Federal Reserve two-day policy meeting was billed as the most important in years, as investors increasingly anticipate the timing of the first US interest rate hike in nearly a decade. The statement released by the Fed on Wednesday at the end of the meeting confirmed that the central bank would wait until it saw further improvement in the US labour market before raising rates, and warned that US economic growth had “moderated somewhat” since January.

Markets took the Fed’s lower forecasts for growth and inflation as signs that it will wait longer than June to make its first move. Although the timing of the first hike is a close call, Keith Wade of Schroders believes that September is now a more likely date, citing the significant strengthening of the dollar this year as the factor tipping the balance. “Imported goods prices will be lower, thus weighing on core inflation and allowing the Fed more leeway on tightening,” commented Wade.

It was a similar story from the Bank of England, as the minutes from the latest meeting of the Monetary Policy Committee echoed comments from governor Mark Carney earlier in the week that a stronger pound raises the risk of a prolonged period of very low inflation. Accordingly, an interest rate rise still looks to be some way off. Indeed, the Bank’s chief economist Andrew Haldane went as far as to suggest that the inflation outlook meant interest rates were as likely to fall further as to rise. Across the globe, as many as 40 countries are actually experiencing deflation.

The S&P 500 Index registered a gain of 2.6% over the 5-day period, its first weekly gain in four. But perhaps of more significance on Wall Street was news that the NASDAQ Composite Index, heavy with technology stocks, was within striking distance of completing a 15-year recovery from its March 2000 dotcom bubble closing peak. Tokyo’s Nikkei 225 also advanced, for the sixth successive week, to reach a new 15-year peak.

Vorsprung durch technik

European markets also got in on the record-breaking act. The FTSEurofirst 300 gained 2% over the week to end at a seven-year high, suggesting that the European Central Bank’s efforts to boost the region’s economy and stave off deflation are working. The CAC 40 index in France closed at its highest level since 2008. However, German equities are emerging as the main beneficiaries – on Monday the country’s DAX index broke through, and closed above, the 12,000 barrier for the first time, and has risen nearly 23% so far in 2015.

Germany’s leading companies were already receiving a big boost from low interest rates, falling oil prices, and a weaker euro that has increased their foreign-based revenues. The ECB’s QE programme has provided an extra shot in the arm to an economy that was already doing well. Strong share-price rallies have been seen by the likes of Daimler, BMW, Merck and Volkswagen; the latter a stock held by Stuart Mitchell of S. W. Mitchell Capital, manager of the St. James’s Place Continental European and Greater European Progressive funds.

“European car sales are recovering sharply across the region. VW has been a significant beneficiary, with Western Europe accounting for just under half of all its car deliveries,” comments Mitchell. “Over the years we have been very impressed by how successfully management has been able to restructure the business to create one of the most profitable car groups in the world. The company has also managed to build an enviable business in the emerging world. In China, for example, VW now has over 1,300 dealers.”

Mitchell reports that German consumer confidence is at its highest level since 2006 and also points to other indicators that the eurozone economy is moving towards “full normalisation”. French residential building permits are at their highest level for several years. “Italian bank Intesa Sanpaolo reported a healthy rebound in lending in the last few months and, at a recent company meeting, Mediaset referred to a sharp pick-up in Italian advertising revenues since the end of last year.”

Time ticking

Elsewhere in the eurozone the picture is less positive. The Greek tragedy continues to be played out. Although news that Greece had pledged to come up with a new reform plan to secure bailout funds helped buoy markets, there is still much to do and time is running out. The current assumption is that Greece only has enough cash to meet all its obligations until mid-April. After marathon talks between Prime Minister Alexis Tsipras, German Chancellor Angela Merkel and other European leaders in Brussels, the Greek leader said he was “more optimistic”; but there are still those who believe the country’s exit from the single currency is inevitable given doubts over the government’s genuine desire to implement reforms.

Some statistics illustrate the scale of the challenge. Greece’s schools are ranked as lowly as any in the EU, yet employ four times more teachers per pupil than the highest ranked, Finland. Its state-owned railway has annual revenues of €100 million against annual wages of €400 million, and €300 million more in other expenses each year. The average employee of Greece’s railway is still earning €65,000 a year. Whilst its population is only 11 million (of the EU’s 507 million), Greece has accumulated debts of €317 billion, or €28,818 per Greek.

Countdown

With only 50 days to go before the general election, Chancellor George Osborne duly delivered a Budget statement designed to appeal to the savers, pensioners and first-time buyers of Middle England. Within plans for a “savings revolution” were announcements of a new tax-free personal savings allowance, more flexibility for ISAs and proposals to allow pensioners to sell their annuities. The Chancellor also confirmed that the lifetime allowance – the amount of a person’s pension savings that benefits from tax relief – would fall from £1.25 million to £1 million from April 2016.

The lifetime allowance has now been cut three times in the past three years. The lower ceiling on accumulated pension savings is not a sum as fantastical as it might first appear. Long-serving senior civil servants, teachers or nurses could now hit the revised lifetime allowance five years earlier than today. For those in defined contribution schemes, it is estimated that a £1 million pension pot will buy an inflation-linked income of £28,000 a year – compared with £35,000 with the current £1.25 million limit. The move also cuts the maximum value of tax-free cash from £312,500 to £250,000.

With weeks to go before the introduction of the government’s new pension freedoms, these further changes emphasise the imperative of taking advice on retirement planning; to ensure the right steps are taken and, equally importantly, to avoid making wrong decisions that could be irreversible and costly, both in terms of tax and future lifestyle.

Schroders and S. W. Mitchell Capital are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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